Sweeping changes to student loans to reach tomorrow’s low-income graduates – Institute For Fiscal Studies

The biggest student loan reform since 2012 will reduce the cost of loans for high-income borrowers, but increase it for low-income people.

Today the government announced the most significant changes to the student loan system in England since fees were allowed to triple in 2012. From the university entrance cohort of 2023, graduates will pay more for their student loans each year, and their loan balances will only be written off 40 years after repayments begin. For the same cohorts, the interest rate on student loans will be reduced at the rate of increase in the retail price index (RPI), a significant reduction of up to 3 percentage points. Maximum tuition fees will be frozen in nominal terms until the 2024/25 academic year.

These changes will transform the student loan system. While under the current system only about a quarter can expect to repay their loans in full, more than 60% can expect to repay under the new system. This is partly because of significantly higher lifetime repayments by students with low and middle incomes and partly because less interest accrues on loans. The long-term benefit to the taxpayer will be modest, at around £1 billion per cohort of university entrants, as higher repayments from low- and middle-income borrowers will be mostly offset by lower repayments from borrowers high income.

Figure 1. Impact of today’s announcements on student borrowers by lifetime income decile (2023 entrants)

Source: Author’s calculations using the IFS Student Funding Calculator.

Distributional implications

The impact of the announced reforms on student borrowers varies considerably depending on their lifetime income. Figure 1 shows gains and losses adjusted for inflation using the consumer price index (CPI). Those with the lowest lifetime incomes lose little from the announced reform, as they will rarely earn more than the student loan repayment threshold, even under the new system. Those on lower average incomes stand to lose the most at around £19,000, as in many cases they will still not be repaying their student loans under the new system, but making repayments for ten more years and on more of their income than under the current system.

Graduates with higher average incomes will almost always repay their loans under the new system, but would not have done so under the old system. For them, the effect of lower interest rates roughly offsets the effect of the lower repayment threshold and longer repayment period. Finally, the highest earners would have paid even under the current system; they earn an average of £24,000 thanks to the lower interest rate, and the lower repayment threshold simply forces them to repay their loans faster.

As a percentage of lifetime earnings, the reform affects borrowers with lower average incomes the most (yellow line). For them, the reform means a loss of lifetime income of more than 1%, or more than a penny for every pound they will earn. However, those lower middle earners will still repay around £9,000 less on average than the highest earners, so their student loans will still be subsidized by the taxpayer. Their losses to the current system arise because the taxpayer subsidy for these graduates will be considerably lower in the new system than it is in the current system.

The reform package also involves a substantial redistribution between the sexes: men are on average winners, while women are bound to lose. On average, men will pay around £5,500 less on their student loans under the new system, while women will pay £6,600 more. Indeed, women tend to spend more time out of work than men and earn on average less than men, even when working. As a result, men are much more likely to repay their loans and benefit from lower interest rates.

Taxpayer impact

We estimate that the proposed changes will reduce the long-term cost of student loans to taxpayers by a relatively modest £1 billion in undiscounted real 2022 terms (adjusted for inflation using the RPI), from £7 billion per cohort to £6 billion. Per borrower, the long-term cost to the taxpayer of issuing student loans will decrease by around £2,600; this will come about equally from lower spending due to the tuition freeze and higher reimbursements. Notably, the cost to taxpayers of funding men’s student loans will actually be to augment following the reform; as a result, the saving on women’s student loans alone exceeds the total by £1.6bn.

However, thanks to an unusual quirk in the way student loans show up in the public accounts, these changes are contributing significantly to the short-term public deficit. We expect the budget deficit to decline by around £5bn in 2023 following the changes, with subsequent impacts on the deficit later as new loans accrue less interest. This will please the Treasury.


The new system has a lot to recommend it. Lower interest rates mean that student loans are now a good deal for all students, whereas previously students whose parents could afford to pay the fees up front and who were convinced that they would earn enough to repay the loan in full, were significantly worse. using the loan system. This is no longer the case, which should increase confidence in the system.

The reform also makes the system much more transparent for students. For most, it’s now appropriate to think of their student loans as more familiar consumer loans or mortgages. Indeed, a majority can now expect to repay the loan at some point, rather than having it written off. Along with lower interest rates, this also means that repayments will more closely match the amounts borrowed. These changes are broadly in line with the recommendations of the Augar review of education and funding after 18, to which these proposals are a response.

However, these advantages of the new system must be weighed against its strong negative impact on low-income graduates. Because of the reduced repayment threshold, they will pay more in the years after graduation, and the extension of the repayment term to 40 years means they will repay longer. That said, given how often changes have been made to the system over the last decade, the idea that this will actually be the basis on which people will be charged in the mid-2060s – 40 years after the when these touchdowns will graduate – is perhaps a bit optimistic.

This is a first response to changes to the student loan system for future cohorts that were announced today. We will continue to analyze the content of today’s announcement and provide further feedback, including on student loan changes for current borrowers, student number controls, minimum eligibility requirements and changes to continuing education and lower degrees.

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